Exam 14: Taxes on the Financial Statements

How are deferred tax liabilities and assets categorized on the balance sheet?

Only U.S. corporations are included in a combined GAAP financial statement.

The valuation allowance can reduce either a deferred tax asset or a deferred tax liability.

"Permanent differences" include items that appear in the Federal income tax return as income or deduction, and in the GAAP financial statements as revenue or expense, but in different reporting periods.

In general, the purpose of ASC 740 (SFAS 109) is to compute and disclose the actual taxes paid by a business entity to state, local, Federal, and foreign governments for the current year.

Gravel, Inc., earns book net income before tax of $600,000. Gravel puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Gravel has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is Gravel's current income tax expense reported on its GAAP financial statements?

A $50,000 cash tax savings that is temporary has the same effect on a corporation's current year effective tax rate as a $50,000 cash tax savings that is a permanent difference.

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 34% corporate tax rate and no valuation allowance.

At the beginning of the year, Jensen Inc., holds a net operating loss carryforward, and its balance sheet shows a related deferred tax asset of $500,000. At the end of the year, the balance in the deferred tax asset account has not changed, but Jensen's auditors want to record a $100,000 valuation allowance against this amount, because of a persistent downturn in Jensen's profitability. Develop the journal entry to record the valuation allowance.

Cold, Inc., reported a $100,000 total tax expense for financial statement purposes in 2010. This total expense consisted of $150,000 in current tax expense and a deferred tax benefit of $50,000. The deferred tax benefit consisted of $90,000 in deferred tax assets reduced by a valuation allowance of $40,000. In 2011, Cold reports $600,000 in book net income before tax. Cold records no other permanent or temporary book-tax differences for 2011. At the end of 2011, Cold's auditors determine that the existing valuation allowance of $40,000 should be reduced to zero. What is Cold's total tax expense for 2011?

Create, Inc., a domestic corporation, owns 90% of Vinyl, Ltd., a foreign corporation and Digital, Inc., a domestic corporation. Create also owns 60% of Record, Inc., a domestic corporation. Create receives no distributions from any of these corporations. Which of these entities' net income are included in Create's Federal tax return for the current year assuming Create elects to include all eligible entities in its consolidated Federal income tax return?

If a corporation has no subsidiaries outside the U.S., its book and taxable income are identical.

Which of the following items are not included in the GAAP financial statement income tax note's effective tax rate reconciliation?

You are assisting LipidCo, a U.S. corporation subject to GAAP, to determine its current-year book expense for income taxes. The following represent the steps that you will take in making this computation. Put the steps into the correct order.

Schedule M-3 of the tax return Form 1120 reconciles financial statement net income after tax with a large corporation's taxable income.

Gator, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 34% corporate tax rate and no valuation allowance.

Create, Inc., a domestic corporation, owns 100% of Vinyl, Ltd., a foreign corporation and Digital, Inc., a domestic corporation. Create also owns 12% of Record, Inc., a domestic corporation. Create receives no distributions from any of these corporations. Which of these entities' net income are included in Create's income statement for current year financial reporting purposes?

In the "rate reconciliation" of GAAP tax footnotes, temporary book-tax differences are reconciled between book income as if taxed at U.S. tax rates and the actual book income tax expense.

Kooler, Inc., is a domestic corporation. It owns 100% of Texas, Inc., a domestic corporation, 100% of Paris, a foreign corporation, and 45% of Iowa, Inc., a domestic corporation.

Which of the following taxes are included in the total income tax expense of a corporation reported on its Federal tax return?